On average, only about 50% of questions were answered
correctly, according to American Century, who conducted the
“On Plan IQ Test,” which was given to people with
investments outside of a company retirement plan.

The Test

According to the survey results,
portfolio rebalancing is the concept that confuses
investors the most.

When respondents were presented with
three true statements about rebalancing, only 13% were
able to select the correct response, which was, of
course, “all of the above”. While 37% of respondents
recognized that rebalancing returns the portfolio back
“to its ideal asset allocation mix,” they did not seem to
understand other aspects of rebalancing. Most confusing
to them was the notion that rebalancing can often entail
selling some of the investments that have performed best
and buying more of those that have lagged – only 2% of
respondents selected this answer, which also was
correct.

Respondents were also asked about
asset allocation (of which they knew very little about),
and common investment terms.

Respondents scored better on questions
related to basic investment practices, however. Over 70%
understood that a “well-diversified portfolio will
experience less volatility,” while 80% understood that
tax-deferred means that “taxes are paid at some point in
the future. Seventy-three percent of respondents
correctly identified the best reason for getting an early
start on a long-term investment plan as “the earlier you
start, the more time your investments have to work in
your favor with compounding.”

Ranking Their Knowledge

The survey also shows that at least
investors aren’t confident that they actually know a
whole lot.When asked to rank their knowledge,
the largest portion of participants (31%) rated
themselves a three on a five-point scale when asked about
their knowledge of basic investment principles. Thirty
percent ranked themselves a one or two, while 38% ranked
their knowledge as a four or a five.

Social Security

Respondents were also skeptical about
Social Security, with many investors not expecting this
entitlement program to be a significant source of
retirement income. Nearly half of the investors polled
(47%) believe that their own savings and investments will
be their largest source of income after they retire,
while only 13% report that Social Security will provide
the largest portion of retirement income.

The survey was conducted by American
Century of 807 individuals who have investments outside
their company’s retirement plan in individual stocks or
stock mutual funds, individual bonds or bond mutual
funds, and other mutual funds such as money market mutual
funds.